This Blog is rather longer than others I have written but it focuses on the economy – something that affects every resident and business in the UK.

I start with R3, the insolvency trade body who report that research shows that 43% of British adults disagree with the Chancellor of the Exchequer’s statement that the economy has moved from ‘rescue to recovery’, compared with only 37% who agree.

Statistics:
· Despite the improving economy, the proportion of British adults who say they struggle to payday has increased from 38% in February to 44% in the latest R3 survey.

· 71% of British adults who struggle to make it to payday blame the rising cost of living, up from 67% in June. 26% of British adults that struggle to make it to payday blame credit card payments for their struggles, while 21% say rent payments are to blame.

· 18-24 year olds face the biggest problems with rent payments, with 28% of those in this age group who struggle to make it to payday saying rent is the reason for their difficulty.

· The latest Personal Debt Snapshot also finds 27% of British adults are without any savings to fall back on. The age group least likely to have any savings are 35-44 year olds – almost two-in-five (38%) in this group say they have no savings.
Phillip Sykes, deputy vice-president of R3, says: “Optimism about the wider economy still isn’t entirely filtering through to how British adults think about their own bank balances. The rising cost of living, credit card debts, and rent costs are all preying on the minds of British consumers, many of whom are finding that their financial breathing room is becoming smaller and smaller. Meanwhile, individual insolvencies have begun to rise again, as has consumer borrowing for the first time in a while. A few quarters of economic growth won’t make up for the impact the two-decade long consumer credit bubble has had on Britain’s household finances. Savings are low and there is still a worryingly high level of household debt out there. If wages can’t keep up with the rising cost of living, more and more British adults will feel like they’re being ‘left behind’ by growth.

In a separate story (30 December 2013, BBC News) we are told that millions of UK households will face “perilous” levels of debt when interest rates begin to rise, according to a think-tank focused on living standards.

The number of people using more than half their disposable income to repay debt could rise from 600,000 to a 1.1 million by 2018 if interest rates rise to 3%, said the Resolution Foundation.

If rates hit 5%, two million households would face huge repayments, it said.

Mortgages are the largest source of UK household debt.

The Resolution Foundation study used the latest five-year growth projections from the independent Office for Budget Responsibility. They said: “Even if we take a somewhat rosy view of how the economy will develop over the next few years the number of households severely exposed to debt looks as though it will double,” said Matthew Whittaker, the senior economist at the Resolution Foundation.But the levels of debt built up by families in the pre-crisis years are such that even relatively modest changes in incomes and borrowing cost assumptions produce significantly worse outcomes.”

The Resolution Foundation said the number of households in so-called “debt peril” – spending more than half their income to debt repayments – was 870,000 in 2007, just before the financial crisis.

If rates do not rise above 3% by 2018, then the Resolution Foundation suggests 1.1 million will be in “debt peril”.

Unemployment rates

“On the most adverse, but still plausible, scenario looked at in the Resolution Foundation analysis the number of households in Britain who spend at least half their disposable income on repaying debts (and are therefore deemed to be in debt peril) could more than triple – from 600,000 in 2011 to 2 million by 2018,” it said.

The predictions apply to all debt, including credit cards and other loans – but mortgages make up the largest slice of most debt in the UK.

Recently, the Conservative-leaning think tank, the Centre for Social Justice, said the average UK household has debts of ￡54,000, including mortgages. This is nearly twice the level of a decade ago and much more must be done to help the UK’s poorest families, it said.

The UK’s deficit with the rest of the world has ballooned to its worst for 24 years despite ambitions to rebalance the economy towards exports, official figures have revealed (reported in The Independent on 20 December).

The current account deficit, which includes the trade balance, earnings on foreign investments and cash transfers in and out of the country, widened to £20.7bn between July and September from £6.2bn in the second quarter. This equals 5.1 per cent of the overall economy, its biggest share since the third quarter of 1989.

The figure, far higher than the £14bn expected by most economists, overshadowed better news from the Office for National Statistics showing stronger-than-expected growth in the past two years. Although overall growth was unchanged at 0.8 per cent between July and September, the economy is now only 2 per cent below its previous peak rather than the 2.5 per cent previously estimated.

The deepening of the current account deficit was caused by a much poorer export performance than previously thought – down 3 per cent in the latest quarter – as well as weaker investment income from abroad. The size of the trade deficit doubled to £10bn while income from overseas investments plunged by £6.9bn.

Ratings agency Standard & Poor’s sounded a warning over the sustainability of the recovery, and the Chancellor’s efforts to boost the housing market, despite maintaining its AAA rating on the UK. It said: “Help to Buy remains in place and, in our view, could increase macro-prudential risks in the economy by lowering households’ buffers against any future house-price volatility.”

The UK suffered a surprise rise in borrowing last month to £16.5bn although it was driven by the timing of payments to local authorities. Borrowing for the eight months of the financial year so far is running 2.2 per cent below last year at £84bn.

Help to Buy scheme will ‘fuel the UK’s next debt bubble,’ warns leading economist

A prominent Left-wing think-tank has warned that 2014 will mark the beginning of the ‘next UK debt bubble’, fuelled by the Government’s Help to Buy scheme. In a gloomy New Year message, the IPPR’s chief economist Tony Dolphin also poured scorn on Chancellor George Osborne’s promise of a recovery led by manufacturing and exports.

Dolphin became the latest economist to take aim at the Help to Buy scheme, launched last year to make it easier for those with small deposits to get on the property ladder.

Many economists, including Dolphin, are worried that this is pushing up house prices to artificial levels, as demand outstrips supply of new homes.

The Bank of England has responded to these fears by promising to keep a close eye on the housing market. It is also skewing the Funding for Lending scheme to focus on small businesses rather than households to prevent a housing bubble building up in future.

‘In the global economy we are truly living beyond our means, and have been doing so for three decades,’ said Dolphin. He also ridiculed the pledge by Osborne in his March 2011 Budget for a ‘march of the makers’ – an economic recovery led by manufacturing industry boosting exports and investment spending.

The TUC weighed in on 31 December casting doubts on the economic recover. They say that only two per cent of voters say they have already benefited from the economic recovery and only a further 18 per cent expect to benefit from the recovery during 2014, according to a new TUC-commissioned YouGov poll published on 31 December.

The TUC say that a big majority of people expect the living standards’ crisis to continue in the New Year. Only one in eight (12 per cent) of those in work expect their pay to at least keep up with the cost of living, the same proportion who report that their pay at least kept up with the cost of living during 2013.

Forecasts published alongside the Chancellor’s Autumn Statement earlier this month show that he is planning to keep cutting spending beyond the election, with a target of reducing public spending as a proportion of GDP to the same level it was in 1948 by 2018/19. But, say TUC, voters do not back plans for a permanently smaller state. More than half (56 per cent) agree with the statement “As the economy grows I want to see most or all of the services that have been cut restored” compared to three in ten (29 per cent) who back “As the economy grows I want to see most or all of the cuts retained.” Even 35 per cent of Conservative voters want to restore services. A slim majority of UKIP voters (47 per cent to 44 per cent) back the restoration of services against cuts.

Other statistics:

· The Institute for Fiscal Studies (IFS) says that 60 per cent of cuts in public services have yet to happen, but voters do not appreciate the scale of the cuts to come. YouGov asked people to say what proportion of cuts have already been implemented. Three in five voters (59 per cent) underestimate the scale of the cuts to come.

· Only one in five voters (21 per cent) “expect the gains of an economic recovery to be fairly shared across the country and society.” More than twice as many (58 per cent) “expect the gains of an economic recovery to mainly go to the types of people and parts of the country who are already doing well.

Despite all these things, the UK could be Europe’s ‘largest’ economy by 2030

The UK will be in a position to overtake Germany as Europe’s largest economy, according to the think tank the Centre for Economic and Business Research (CEBR). It predicts that Germany will lose its current top spot in Europe by 2030. It cites the UK’s population growth as an aid to economic acceleration.

The report echoes the recent confidence of other business groups such as the British Chambers of Commerce (BCC). Earlier this month the BCC said that the UK economy will surpass its pre-recession peak in 2014.

In its annual World Economic League Table, where it ranks the ups and downs of global economies, and forecasts their future position, the CEBR said in addition that China will overtake the US in 2028, which is later than some analysts have suggested.

The UK will overall perform second best of all advanced economies, the CEBR said. Yet, this performance will still lag behind growth in emerging countries such India and Brazil.

The CEBR in its report added that in addition to the UK’s population growth boosting economic expansion, that “lesser dependence on other European economies” would also aid progress, as well as “relatively low taxes by European standards.”

However, CEBR said that should the euro “break up”, “Germany’s outlook would be much better.”

All of this may be true, but let’s hope we don’t get to 2030 with an even bigger debt deficit than we already have and with millions of people facing personal bankruptcy unable to pay the huge borrowings they took on board to buy their houses when interest rates were cheap. Remember that “bigger” isn’t always “better”.

Martin Pollins is a Chartered Accountant with wide experience in corporate finance and business management. He holds a number of directorships and has served on the boards of several companies, including those listed on the London Stock Exchange, AIM and OFEX.

He was a Council member of the Institute of Chartered Accountants in England and Wales from 1988 to 1996.

Martin Pollins ran his own firm based in Sussex and was the first Accountancy firm in the UK to advertise on television and Martin went on to create and launch the CharterGroup Partnership (the UK's first Accountancy network) and then LawGroup UK (one of the largest networks of lawyers in the country).

Martin started work on the Bizezia concept in 1996, developing the broad range of information resources and products over the past 18 years.